On the bailout

Larry Summers,  Secretary of the Treasury under Bill Clinton and former president of Harvard,  says the bailout is just a start -- necessary, although regrettable,  and need not necessarily force us to cut back on health care, energy, education, and tax relief.  

It is impossible to predict the ultimate cost to the Treasury of the bailout and the other commitments that financial authorities have made -- this will depend primarily on the economy as well as the quality of execution and oversight. But it is very unlikely to approach $700 billion and will be spread over a number of years.

Second, the usual concern about budget deficits is that the need for government bonds to be held by investors will crowd out other, more productive, investments or force greater dependence on foreign suppliers of capital. To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect.

Third, since Keynes we have recognized that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times. After using the economic expansion of the 1990s to bring down government indebtedness, the United States made a serious error in allowing deficits to rise over the past eight years. But it would compound this error to override what economists call "automatic stabilizers" by seeking to reduce deficits in the near term.

Indeed, in the current circumstances the case for fiscal stimulus -- policy actions that increase short-term deficits -- is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.

The economic point here can be made straightforwardly: The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure or energy or simply by providing tax cuts that allow families to avoid cutting back on their spending.

Fourth, it must be emphasized that nothing in the short-run case for fiscal stimulus vitiates the argument that action is necessary to ensure the United States is financially viable in the long run. We still must address issues of entitlements and fiscal sustainability.

One issue nobody has addressed though, is the widespread loss of faith in the government.  The bailout is received with skepticism because we don't trust.  We assume that there are secret backroom deals to take care of the rich and undeserving who got us into this mess.  We know that Congress routinely accepts money from lobbyists of large corporations -- for example, the largest contributers to Chris Dodd, chairman of the Senate banking Committee, are banks.  Few have any faith that Congress or the executive branch act in the best interests of their constitutents.

It's true that the current financial situation has been a long time brewing and the Bush administration is not solely to blame.  But they accelerated and exacerbated the situation by emasculating or removing regulations that had been put in place to prevent such a meltdown, and Congress didn't lift a finger to stop them.

A necessary sequel to the bailout must be transparency.  For 8 years the Bush administration has perpetrated many of its acts behind a veil of impenetrable secrecy, and that is one reason nobody really knows how much damage the economy has suffered.  That must be corrected.  In order for this country to function effectively, the actions of the government must be visible to all and open to comment.